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How Long Can Costco Keep Soaring?

By Dan Caplinger - Sep 27, 2018 at 8:50AM

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The big-box warehouse retail king is firing on all cylinders -- for now.

Traditional retailers have faced a huge threat over the past 20 years from the rise of e-commerce. As shoppers have gotten used to purchasing things online, big-box stores have found it harder to compete. Yet through it all, warehouse-club giant Costco Wholesale ( COST -0.82% ) has kept its loyal customer base, posting strong performance in key shopping seasons and trying to build its own e-commerce presence without taking anything away from its successful store network.

Costco will announce its fiscal fourth-quarter earnings on Thursday, Oct. 4, and investors fully expect to see continued solid performance from the warehouse retailer. With the stock having climbed to new record levels in recent months, Costco's shareholders have high expectations, and anything short of complete success could raise concerns that in turn could lead to a pullback.

Key stats on Costco

Expected EPS Growth

13.5%

Expected Revenue Growth

4.7%

Forward Earnings Multiple

30

Expected 5-Year Annualized Growth Rate

12.2%

Data source: Yahoo! Finance.

Can Costco keep up the pace?

Investors have been quite pleased about Costco, and they think that its earnings could be particularly good in the near future. Analysts watching the stock have boosted their projections for fiscal fourth-quarter earnings by nearly 2%, and they've made more modest increases in their full-year projections for fiscal 2018 and 2019. The stock has rewarded Costco's performance, climbing 11% since late June.

Costco's fiscal third-quarter results showed the fundamental success that the retailer has enjoyed lately. Revenue jumped 12%, and after adjusting for the impact of a special stock dividend, adjusted net income was higher by more than 20% on a per-share basis. Total-company comparable sales jumped 10.2% during the period, although rising gas prices and foreign currency impacts inflated those numbers slightly. After adjusting for currency moves, Costco's domestic business saw the strongest growth, and the company managed to grow its e-commerce revenue by 37%.

Costco-brand copy and print paper box.

Image source: Costco Wholesale.

Looking ahead, we've already seen most of what we need to project out sales trends for the fiscal fourth quarter, and the overall trends look favorable. For June, comps rose 9.7%, with the gain falling to 6.9% after adjusting for currencies and gasoline prices. July's figures showed a continuing slowdown, with comparable sales figures of 8.3% and 6.4% respectively depending on whether you leave figures unadjusted or make allowances for gas prices and foreign exchange. However, August's numbers accelerated, with comps gains of 9.2% working out to an 8% rise on an adjusted basis. E-commerce growth figures remained in the 20% to 30% range in all three months.

Now that competitor BJ's Wholesale Club ( BJ 1.75% ) has re-emerged onto the public stock market, it will be interesting to see what impact it will have in the quarters ahead. BJ's went private back in 2011, and shares of the warehouse competitor have done extremely well since the IPO back in July. Yet in the corporate documents it had to file in order to offer shares, BJ's revealed that its sales performance during its time as a private company was tepid at best, failing to live up to the annual sales gains that Costco has achieved. Costco has proven its ability to outperform other rivals, notably Sam's Club, and few expect BJ's to offer a big challenge to Costco's overall strategic vision.

Investors should watch the Costco earnings report to see how the company anticipates handling the key holiday shopping season. For now, everything suggests that staying on its current strategic course should be the best way to keep the good results coming. However, Costco has proven to be quite adroit at identifying changes in customer preferences and making appropriate corrections quickly, so it'll be interesting to see whether the warehouse retailer sees any big shifts coming in the near future.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$525.51 (-0.82%) $-4.33
BJ's Wholesale Club Holdings, Inc. Stock Quote
BJ's Wholesale Club Holdings, Inc.
BJ
$64.38 (1.75%) $1.11

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